Smart is the New Rich: Money Guide for Millennials

By Christine Romans

Time is on your side—smart money management for Millennials

Smart is the New Rich: Money Guide for Millennials is an interactive, step-by-step guide to all things money. From credit, student debt, savings, investing, taxes, and mortgages, CNN's chief business correspondent Christine Romans shows this newest generation of earners how to build wealth. You'll learn the old-fashioned approach that leads to a healthier financial lifestyle, and open the door on a straightforward conversation about earning, saving, spending, growing, and protecting your money. You'll learn how to invest in the stock market or buy a home, even if you are still paying off student loan debt. Romans offers expert insight on the "New Normal," and why the rules of the credit bubble—the one you were raised in—no longer apply. Checklists and quizzes help solidify your understanding, and pave the way for you to start putting these new skills into action.

For thirty years, the financial rules for life revolved around abundant credit at the ready. A quick look around makes it obvious that those rules no longer work, and Millennials just now coming of age and entering the workforce need a new plan to build a solid financial foundation and healthy money habits. This book puts you on the right track, with step-by-step help and expert guidance.

• Learn what you should ask yourself before spending any money
• Revisit some old money rules that are actually good habits
• See simple rules for managing student debt
• Learn how to talk about money with friends, dates, and parents
• Find out what makes a Millennial successful in the workforce

The economy is out of recession and growing, but many young people feel left out of the recovery. It's why smart spending, saving, and debt management is so critical right now for them. A smart money plan is no longer a "nice to have" extra, it's mandatory. Smart is the New Rich: Money Guide for Millennials is your guide on how to use time and some good money manners to build wealth.

• Language: English
• Publisher: Wiley
• Release date: Mar 3, 2015
• ISBN: 9781118949368

Book preview

Chapter 1

How to Think About Money: Budgeting Basics

I think the best advice I've ever received is to plan for the future and to save your money. To plan for the future in a way you can have the same lifestyle after you've finished your job? That takes some planning and saving.

—Danica Patrick¹

The common denominator of so many successful people I interview is an urge to save money and build for the future. Danica Patrick is the most successful woman in U.S. auto racing—a race car driver, fashion model, and marketing maven. The best advice she ever received? How to take the last turn, how to navigate the pit, how to get the most out of the last drop of fuel? No, the best advice she ever received—and gives to others—is simple and classic. Save your money.

It's really not complicated at all. Money saved today and invested properly—amplified by time—means wealth in the future. It's the little black dress of prosperity. It never goes out of style. Among the many gems from legendary investor Warren Buffett, this sums it up best: Someone is sitting in the shade today because someone planted a tree a long time ago.²

No one is going to plant that tree for you. The key words here are you and time. Unless you win the lottery (you won't) or have a trust fund (nice, but unlikely) or have the brain of Mark Zuckerberg (don't we all wish?), you will grow wealth only one way: by spending less money than you earn. Investing your savings over time grows wealth.

Prosperity Formula

equation

There is a surefire, can't-miss way for millennials, loosely defined as young adults ages 18 to 35, to become millionaires. Call it a get-rich-not-so-quick scheme. Fidelity Investments studied the habits of people who earned less than $150,000 a year but had retirement account balances topping $1,000,000.³

What's the secret of these 401(k) millionaires? They started saving young, and they socked away a big part of their paychecks. How big? Fourteen percent of their pay each year—before any company match in a 401(k).

They started young, maxed out their savings, and took the free money that is the 401(k) company match—that is, the money your employer offers to contribute to your 401(k) plan. They weren't too conservative in their portfolios. The younger you are, the more stocks you should own. In fact, on average they had 70 percent of their retirement savings in stocks. (Bonds and savings accounts yield very low returns for savers and conservative investors. More on this, and alternative investments if your employer does not offer a 401(k), in Chapter 8.)

Bottom line: They started early. And you can, too.

Let's make something clear from the start if we are to spend the upcoming pages together. I don't believe you are a generation of lazy, narcissistic, reckless-spending, entitled tech junkies. (A Google search of the term millennial or gen y is entertaining.) In fact, I'm incredibly optimistic about the innovation and open-mindedness you're already bringing with you to the workplace. As I have crossed the country speaking with students and graduates and reporting on companies and economics, I have found that, despite the pile of bad luck you were dealt by the financial crisis, you are a generally optimistic and entrepreneurial bunch. You're the most educated generation in U.S. history, and you understand technology in an intuitive way that no other generation can.

The economy is slowly healing, and you're poised to succeed. I'm more optimistic by the day about your job prospects. Hiring for the class of 2014 jumped a stunning 8.6 percent from 2013.⁴ Whether they're looking for accounting, computer science, engineering, or M.B.A. graduates, more than half of companies surveyed reported they were stepping up their hiring.

We'll discuss the job landscape further in Chapter 4, but for the purposes of how you think about money, the subject of this chapter comes against an improving backdrop. The jobs market is healing. The current recovery was among the slowest postrecession jobs recoveries, but finally all the millions of jobs lost in the Great Recession have been recovered.⁵ Technology will provide new opportunities we can't even predict today. And your generation—innovative by nature—will play a central role in that.

Yes, there is a considerable problem of too much student debt and too few jobs for recent graduates. But I don't think that all millennials have been permanently sidelined by their student loans, nor have they been permanently left out of the jobs market. We'll explore managing that debt in Chapter 2 and getting a job in Chapter 5, but in this discussion of how you think about money, it's time to relegate debt and jobs to background noise. Repeat after me: You have something to offer the workforce, and you can manage your student loans.

The typical student loan burden can be manageable. According to a report from the Brookings Institution, just 7 percent of households with student debt have a burden of $50,000 or higher.⁶ About a third of bachelor's degree graduates have no debt at all, and the average debt of those who do hovers around $30,000. There is a rule of thumb in college savings and planning: You can afford to borrow for college about as much as you expect to earn in your first year's salary. If you are the typical business major, that means you can afford to borrow around $50,000. Humanities and social science graduates can afford to borrow less.⁷ The average starting salary for the class of 2014 rose 1.2 percent from the prior year, to $45,473, according to the National Association of Colleges and Employers (NACE),⁸ with wide variations by discipline (Table 1.1).

Table 1.1 Average Salaries by Discipline

Source: National Association of Colleges and Employers

If your student loans are getting you down, remember this: A college graduate will earn, on average, a million dollars more over the course of a working career than a high school grad.⁹ Handling student debt diligently will be a key part in your strategy for building wealth. The vast majority of college borrowers with less than $50,000 in student loan debt can certainly be moving forward in their financial lives and using their best asset—time—to work for them. Don't let anyone tell you it's impossible to plan for the future while still paying off the past. It can be done. (Chapter 3 will help you organize your approach to managing debt.)

This is not a book for defeatists. It's a book for young people of any means who want to build wealth. Whether you have loan debt, were fortunate enough to graduate debt-free, or are considering college or studying now, it is critical to save early and train yourself in habits to make your money grow.

Most of us didn't grow up reading the Wall Street Journal, and many high schools teach rudimentary economics if anything at all. In grade school, children still learn to count change, yet there is little if any real preparation for the dizzying array of college financing schemes, prepaid debit cards, peer-to-peer loans, and countless other accounts millennials get pitched every day. Financial literacy is not something the United States does well, and most families would rather talk about religion or politics than money. There's no shame in getting started now. The old cliche that it is better late than never does not apply here. You are reading these words now, and you have the most valuable ingredient you need: time.

In the workforce and in the headlines you have undoubtedly heard and read those old clichés attached to the newest generation. They don't work as hard. Consumer technology makes them lazy and entitled. They are selfish. However, a seminal study of millennials by the Wall Street research firm UBS found something very different—and very exciting—for any member of this generation looking for success. That study found that millennials have learned the lessons from the financial crises during which they grew up and are now primed to save more money and build wisely for the future. Think of your generation as being as powerful as the baby boomer generation—you will have an equally huge impact on the economy once you hit your stride financially.

Millennials shatter stereotypes, believe in hard work, worry about parents' financial health, and define success as a combination of money, healthy relationships, and enriching experiences.¹⁰

—UBS Investor Watch

The UBS study found this generation more likely to save, more frugal, and more resilient than prior generations. UBS found that words like entitled and lazy don't fit the reality.

UBS asked millennials to define success: How do you know when you have arrived?

Emotional (39%)

Having a happy family (45%).

Having a deeply meaningful relationship with my spouse/partner (37%).

Staying true to the values I believe in (18%).

Leading a calm, simple life with people who care about me (17%).

Financial (30%)

Having financial freedom (48%).

Being able to provide for future generations of my family (15%).

Being well-compensated for what I do (14%).

Owning things I aspired to have, such as art, a second home, a boat, and so on (12%).

Experiential (24%)

Living a full life with a wide variety of experiences (37%).

Enjoying the work I do (29%).

Being someone from whom others seek advice/opinions (4%).

Knowing interesting, creative people (2%).

Achievement (7%)

Achieving more than my parents or my peers (7%).

Reaching a very senior job position, such as a C-Suite position (7%).

Owning my own business (5%).

Being able to give significantly to charity (3%).

Source: UBS

In fact, money matters to millennials, UBS found, but they fall short of the greedy tag one might apply to their elders. Success to millennials means hard work (69 percent), saving and living frugally (45 percent), and a good education (37 percent). And success is not just about money. This generation's definition of success is more nuanced, adding emotional and relationship factors to the formula and not just traditional measures of financial health.

Achieving that success takes some simple first steps. And the most critical is the monthly budget.

Pay Yourself First

The first key to building wealth is to live below your means. The money you don't spend you put to work. For many years, it was the American way to spend more than we earned, using credit to pay for the rest. Millions of Americans burned through their money, justified by the false assumption that the price of their home would rise forever. Easy credit made people feel rich. When the recession hit, these spenders took the biggest hit financially. Today, smart is the new rich, and being smart begins with a budget. Even the word budget makes most of us cringe. It's a loaded word, full of limitations, that we think is more suitable for older generations. But a budget is the money version of a healthy diet. Once you identify the empty calories in your budget, you'll feel better and more focused.

A budget is simply a plan. And it's the nonnegotiable habit for growing wealth. Patrick O'Connell, executive vice president of the Ameriprise Advisor Group, works with thousands of financial advisers across the country. The price of success is paid for in full in advance, he tells me. Having a budget and saving money every month is paying yourself first.

We see many millennials interested in building wealth who have to start building the savings plan first. Pay yourself first, and work the expense base off the remainder, O'Connell says. He likes to start with these three steps:

Three Steps to Building Your Budget

Identify how you are spending money now.

Evaluate your current spending and then set goals that take into account your long-term financial objectives.

Trace your spending and make sure it stays within your guidelines.

Often, we feel as though we have a general idea of how much money is coming in and going out each month. But you've got to put down on paper every penny.

Financial expert Stephanie Genkin, a Brooklyn-based independent fee-only planner who advises millennials, says it's always possible to become a saver.

I worked with a young woman who had no debt but liked to treat herself to expensive new clothes and books every month. We talked about what it would be like for her to scale back on her spending in order to put away a little money each month for retirement and a rainy-day fund. I got through to her by telling her what her life might be like 10 to 20 years from now without savings. She now contributes 3 percent to her 401(k) and automates a fixed amount of her paycheck to a savings account.

There are helpful online tools and budget apps like www.mint.com to analyze your habits and craft a budget. Check out your bank or credit union website for tools to use for budgeting, tracking your spending, and automatically paying bills. Websites for money managers Fidelity and Ameriprise Financial have helpful tips for organizing which bills to pay. It's incredibly important to really know how much you are spending each month in every single category. Only then can you spend less than you bring in and grow the difference.

I grew up with a frugal father, who had very simple rules about money that he often boiled down to entertaining little rhymes, one of which is the basis for every budget: Keep your burn rate less than your earn rate. It means spend less than you earn. The budget helps you figure out how.

To get started, you need to ask yourself a few questions.

Does your income money last as long as the month?

Are you spending more than 28 percent of your take-home pay on housing costs?

If you live at home, are you saving a little each month for a deposit on an apartment?

Are you carrying a balance on your credit cards?

If so, how many months will it take to be credit card debt–free?

If your phone breaks, do you have money to get a new one?

Your best friend from childhood just announced a destination wedding. Do you have the money to make it (not to mention the bachelor/bachelorette party)?

If you have a job, does it offer a 401(k), and are you contributing enough to get the company match?

Do you have three months' living expenses handy in case of an emergency?

Take note that I didn't even bother asking the age-old financial adviser question: At what age do you want to retire? That's because (1) it's nearly impossible for any young generation to really get their head around this question, since it's the last thing they think about; (2) forced savings plans like 401(k)s and IRAs (more on these in Chapter 8) help address the retirement issue; and (3) there are more pressing financial decisions facing millennials in the near term. Beyond the aforementioned I have to pay for a new phone dilemma, there are a host of other costs millennials have to prepare for, notes Ameriprise's O'Connell.

Buying homes, selling homes, cars, children, weddings—you name it. So think about medium term financial goals and start building momentum. The first $5,000 or whatever your goal is to accumulate is the hardest, says O'Connell. After you reach that first goal, it becomes easier. So you want to focus on a strong financial foundation.

How Much Should You Save?

We'll more fully explore these questions, how to answer them, and how to get there in the pages ahead. Planning a budget means recognizing how far you are from these goals. You have to know what is coming in and going out before you can slot money for investments, real estate, and retirement goals. Write down every little expense—including the price of your morning bagel, change for doing laundry, the amounts for phone/Internet bills, and what you shell out for entertainment. Track your spending, make realistic goals, and be consistent. Once you're on track—with housing costs in line with what you can afford, high-interest credit card debt paid off, and student loan payments automatically paid each month—the next step is building wealth.

Throughout human history, civilizations endured because people planned for the future by socking away a little of today's wealth for the next year. They saved some of this year's crop to plant again the next year to guarantee stability (and wealth) for coming years. Eat all your seed corn now, and you'll starve later. It sounds rather Game of Thrones, I know, but, really, unless you budget, save, and prepare, you're leaving an awful lot to luck.

That's a bleak way of saying that Americans spend too much and save too little. On average, Americans save about 4 percent of their income each month. The savings rate has slowly improved since the Great Recession ended, but it still is not high enough. A reachable target is 10 percent, and those Fidelity 401(k) millionaires put away 14 percent on average, starting young.

As you prepare your budget, if you can't get to 10 percent right away, start more slowly. Squeeze just 1 percent out the first month, then 2 percent the next month. Ratchet up the savings, and trim the spending bit by bit.

You've got to save every penny.

—Carmelo Anthony, New York Knicks, CNN March 2012

I often hear from readers and viewers that they don't have any money to save, that their finances are out of their control, and that until they get a better job or move to a different city or pay off their student loans, they can't save another penny.

I always circle back to the advice from my friend and frequent CNNMoney guest Ryan Mack. He's the president of Optimum Capital Management, and he is a true believer that anyone can make a budget and find money to save in it, no matter their circumstances. His mother raised two